Shifting Sands: Will FIIs Return To Indian Shores?

The Indian equity market currently grapples with a cloud of uncertainty, with volatility reaching its peak. Fils have been consistent net sellers for months, offloading a significant ₹1.20 lakh crore in 2024 alone. This raises a critical question: Is this indicative of a fundamental shift in their view on the Indian growth story, or are they contending with temporary headwinds? Mandar Wagh delves into the potential reasons behind Fil selling and explores when Fils might return to India

- mandar Wagh

While major global indices have been on a tear in 2024, scaling new peaks, India's frontline indices have presented a more muted performance. Despite achieving record highs themselves, the Indian benchmarks have delivered comparatively modest gains of 3-4 per cent year-to-date. This stands in contrast to most other leading indices, which have clocked double-digit returns.

The gain, though small, in the Indian equity market is a testament to the unwavering confidence of domestic institutional investors (DIIS). This stands in stark contrast to the behaviour of foreign institutional investors (FIIS), who have been net sellers. While FIIs remained optimistic on India even during the corona virus-triggered pandemic downturn, attracted by discounted valuations, their stance has demonstrably shifted now. Since 2021, they have been net sellers, offloading a staggering ₹1.20 lakh crore in 2024 alone, excluding a modest buying spree in March driven by expectation of better results around year-end financial performance.

The FII Effect: A Double-Edged Sword for Indian Markets

The relationship between FII activity and equity market performance is an intricate dynamic. FII inflows serve as a catalyst for the market. As FIIs inject fresh capital, they become eager buyers, driving up demand for stocks. This increased competition pushes the share prices higher, creating an optimistic feedback loop that can fuel a bull run. However, FIIS are also known to be reactive to global market trends and risk appetite. If economic concerns or volatility rise, FIIs might become risk-averse and start pulling out their investments.